Money, Inflation, and Relative Prices: Implications for U.S. Agriculture

Barry Falk, S. Devadoss, William H. Meyers
January 1986 [86-WP 1]

In a recent study, Starleaf, Meyers, and Womack (S-M-W, 1985) analyzed the behavior of annual time series data in the United States on various farm and nonfarm price indices over the 1929-1983 period and three subperiods in order to examine the proposition that changes in the general rate of inflation have Nonneutral effects on the farm sector. They found that short-run increases (decreases) in the rate of inflation of farm input and nonfarm output prices have typically been accompanied by even larger short-run increases (decreases) in the rate of inflation of farm output prices. While S-M-W did not explicitly account for the effects of unanticipated inflation on these relative prices in their empirical analysis, they concluded that these regularities indicate that an unanticipated increase (decrease) in general inflation rate tends to enhance (diminish) the well-being of farmers. This conclusion is consistent with macroeconomic theory that unanticipated aggregate demand shocks will affect relative prices in favor of producers of nondurable goods traded in flex-price markets. It is however, surprising to the believers of the conventional wisdom, who content that farmers suffer from inflation. Tweeten, for example, has presented evidence in several studies that he says support the view that farmers hare harmed by higher rates of general price inflation.